Scorching Payrolls Data Likely Seals Fed Pause in January — Evening Brief – 01.10.25
Market participants anticipated a decrease in the December nonfarm payrolls report following the 227,000 print last month, with consensus anticipating a gain of 165,000. However, they were not anticipating the scorching number of 256,000, which was nearly 100,000 above the median estimate of 157,000 and a 4 sigma beat. The November figure was adjusted downward to 212,000, while the October figure was adjusted upward by 7,000 to 43,000.
The stellar payrolls report, along with the unemployment rate declining to 4.1% from 4.2%, effectively eliminates any prospects for an interest rate cut at the FOMC’s January meeting and possibly subsequent meetings. Moreover, the underemployment rate decreased to 7.5% from 7.8%, marking a six-month low.
The only negative data point in the report was average hourly earnings, which climbed by 0.3%, as expected, but fell from 0.4% in November. On an annual basis, average hourly wages increased 3.9%, falling short of estimates of 4.0% and declining from the 4.0% rate seen the previous month. The labor force participation rate remained at 62.5% in December and has been between 62.5% and 62.7% since December 2023.
Fed Policy Implications
The data doesn’t give the Federal Reserve an urgent cause to decrease interest rates at their next meeting on January 29 said Bankrate senior economic analyst Mark Hamrick. The Fed “wants to remain flexible, in part to gauge the impacts on the economy stemming from ambitious goals on the part of the incoming administration. The takeaway for consumers, borrowers, savers and investors is that rates might remain high for longer,” he said.
Today’s data certainly makes the continuation of the Federal Reserve’s easing cycle a difficult task. The probability of the federal funds rate holding steady at 4.25% to 4.50% jumped to 97.3% from 93.6% on Thursday, according to the CME FedWatch tool. Moreover, the rise in U.S. Treasury yields is likely to be a concern as well, with the 30-year yield set to break above 5% and the curve continuing to bull steepen.
FOMC policymakers are also expressing caution about further near-term policy easing. Susan Collins, President of the Federal Reserve Bank of Boston, advocated a more cautious stance for future interest rate decreases on Thursday as the US economic outlook faces “considerable uncertainty.”
Collins noted that inflation remains sticky and expects inflation in 2025 to run “somewhat higher” than previously thought, “with the risks likely having shifted to the upside,” she said in remarks prepared for delivery at for a NAIOP Massachusetts event.
Kansas City Fed President Jeff Schmid favors moving cautiously in further cuts as well. “With inflation close to target and growth showing continued momentum, I believe we are near the point where the economy needs neither restriction nor support and that policy should be neutral,” he said Thursday, according to prepared text for a speech.
Federal Reserve Governor Michelle Bowman, the lone dissent at the Federal Open Market Committee’s September meeting, preferring a quarter-point rate cut, said Thursday she still supports “a cautious and gradual approach,” citing stalled progress on lowering inflation.
“The rate of inflation declined significantly in 2023, but this progress appears to have stalled last year with core inflation still uncomfortably above the committee’s 2% goal,” Bowman said in a speech prepared for delivery at the California Bankers Association.